More certainty on prospect of Indonesia's incoming government policies is needed

Political developments will be critical.

Foreign fund outflows reached about USD 0.25bn in the first 8 days of October, and the IDgov bond market also saw some outflows in October, circa USD 0.33bn in the first 3 days of October alone (data is usually lagged for about a week).

According to a research note from DBSD, if these were to continue, October will be the first month in 2014 that net foreign outflows in both the equity and IDgov bond markets will be seen.

The external risk environment is clearly a factor but markets have also been watching political developments in the country, the report noted. Recent setbacks for Jokowi’s coalition in the parliament mean that doubts have re-surfaced about his abilities to push for tough reforms. And the incoming government has a long list of tasks.

Here’s more from DBS:

Take the current account deficit problem for example. It is very much structural in nature and we have previously argued that there is a need to push for reforms in the oil & gas sector and to re-energize the manufacturing sector.

Given the uncertainties during this transition period, the risk is that there will be pressure on Bank Indonesia (BI) to do more than it should.

The central bank’s monetary policy stance has been consistent this year, in that it is directed to safeguard financial market stability.

Tolerance for a weaker rupiah, slowing loan growth and keeping interest rate high are parts of the plan.

And the central bank has not been shy to smooth rupiah volatility in the market. Foreign reserves were pretty much flat in September during the most recent bout of rupiah weakening.

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More certainty on prospect of the incoming government’s policies is needed, and on this issue, political developments will be critical.

Ahead of the October 20 presidential inauguration, the cabinet line-up will be announced amidst high expectations that technocrats will fill the key portfolios, including the energy ministry.